Indonesia considers trade options post TPP

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US President elect Donald Trump's confirmation he intends to pull out of the TPP has led to confusion and uncertainty across the region. For its part, Indonesia is still keen to sign on to the TPP but there are many factors to consider in the cost-benefit analysis on the topic the Indonesian government is now undertaking.

The soft outlook for growth in world trade and increasing protectionist sentiment from the US in particular has prompted Indonesia to consider other ways to increase its share of global exports.

The TPP went beyond trade. It would have also imposed higher standards on state owned enterprises, intellectual property rights, and environmental protection. Although its 12 members - the US, Canada, Australia, Japan, New Zealand, Mexico, Chile, Peru, Malaysia, Singapore, Brunei and Vietnam - all signed the agreement on 4 February 2016, it has not yet been ratified by each. If the US pulls out, experts believe other TPP signatories will be reluctant to ratify as a TPP without the involvement of the world's biggest economy proposal is very different from one with the US. Japan has declared the TPP to be 'meaningless without the US' and Vietnam has indicated that while it still supports the TPP, it will not proceed toward ratification at this time in the light of US actions.

At the APEC meeting in Peru last week, leaders reiterated their commitment to open markets and toward resisting all forms of protectionism. A multilateral trade agreement remains the most likely counter to rising protectionist sentiment. If the US leaves the TPP, it could leave a gap for China to step up and dominate trade in the Asia Pacific. In this regard, China can offer strong leadership as it is a developing country with the largest population in the world and its steady growth has boosted growth both regionally and globally. China has proposed two agreements, the Free Trade Area of the Asia-Pacific (FTAAP) and the Regional Comprehensive Economic Partnership (RCEP), which is increasingly being viewed as competitors to the TPP. FTAAP negotiations would be based on either TPP or RCEP.

RCEP negotiation partners include the 10 ASEAN (Association of South-East Asian Nations) countries and six trade partners: Australia, China, India, Japan, New Zealand and South Korea. It's estimated this agreement would cover almost a third of the global GDP. China’s keenness to push RCEP forward is not difficult to understand given China is heavily invested in ASEAN countries.

Indonesia's interest in joining the TPP was motivated by concern it would lose out in export markets to Vietnam and Malaysia. Before Trump, when the choice was TPP or RCEP, Indonesia was acutely aware this decision could shape the country’s future. The thinking was that, by joining the TPP, Indonesia would be in a non-bloc position, not aligned with either the US or China. Joining the RCEP, a China-led multilateral trade agreement, would bring Indonesia economically and geopolitically closer to China, particularly if it coincides with the rise of protectionism from the US.

Today Indonesia has favourable economic relations with both China and the US, particularly in regard to exports and foreign direct investment opportunities. According to data from the Indonesia Investment Coordinating Board (BKPM), China ranked 4th out of 84 on the list of foreign direct investors in Indonesia during the first quarter of 2016 with realised investments of US$464.59 million. The US was ranked 21st, with realised investments of $US10.65 million. In term of Indonesia's export value in 2015, China ranked 3rd with Indonesian exports to that country valued at $US16.3 billion. The US was one rung up, Indonesia’s second biggest export destination by value, worth $US15 billion.

With the TPP's future uncertain, Indonesia is looking at various other options. At the APEC meeting last week, Indonesia proposed a new cooperation forum of ASEAN-Pacific Alliance (APA) that could counterbalance the domination of the United States and China. This APA, consisting of ASEAN countries and Mexico, Peru, Chile, and Colombia, would run in parallel with the Chinese government's proposal on FTAAP. While APA holds some promise as a multilateral trade pact, in the short term, making RCEP successful is more critical for Indonesia as RCEP is expected to be fully implemented by next year.

The Indonesian government is also trying to increase trade diplomacy with partner countries through bilateral agreements. If the US quits the TPP, there could be an opportunity for an Indonesia-US trade negotiation, especially given the US President-elect has expressed a preference for bilateral over multilateral deals. Indonesia also has the opportunity to increase trade value with those countries feeling the brunt of uncertainty ushered in by the US presidential election result, such as India, Mexico and Japan.

Indonesia is also working hard on finalising two Comprehensive Economic Partnership Agreements with Australia and the European Union. Concluding these, and the RCEP, would provide significant opportunities for Indonesia to boost its exports and garner a bigger slice of world trade.